Market trends during 2021 make for a challenging start to the next year for investment advisers and managers.

While strong company performances allowed the markets this year to outperform, the S&P 500 benchmark index will likely face a volatile 2022, especially in the early months of the year, according to participants in the Star Tribune's 2021 Investors Roundtable.

The following professionals gathered for the annual analysis of market trends and performance: Lisa Erickson, U.S. Bank Wealth Management; Jim Paulsen, Leuthold Group; Erica Bergsland, Securian Asset Management; Carol Schleif, BMO Family Office; Biff Robillard, Bannerstone Capital; Mansco Perry, Minnesota State Board of Investment; and Craig Johnson, Piper Sandler.

Last year's participants forecast growth, but nobody was expecting the S&P 500 to climb nearly 26% between this year's meeting and last.

Johnson was the closest, predicting the S&P 500 would finish 2021 at 4,225. The S&P 500 closed at 4,687 on Dec. 7 when participants met over Zoom.

Looking ahead to 2022, the panel sees less growth but more volatility in 2021. As one guest put it, investors were wondering how the market could have been so good in 2021 when the economy was so bad. Next year, he suspects they'll wonder how the market could be so bad when the economy is so good.

The following are excerpts from the discussion, edited for clarity and length.

Meet the roundtable

Lisa Erickson

Senior vice president and co-head, public markets due diligence group for U.S. Bank Wealth Management

Jim Paulsen

Chief investment strategist at Leuthold Group and market and economic commentator

Erica Bergsland

Senior vice president and chief risk officer of Securian Asset Management

Carol Schleif

Deputy chief investment officer for the ultra-high net worth office of BMO Family Office

Biff Robillard

President and portfolio manager for Bannerstone Capital, which manages $125 million for 75 families

Mansco Perry

Executive director and CIO for Minnesota State Board of Investment, which invests for state retirees and funds

Craig Johnson

Managing director and chief market technician of Piper Sandler's technical research group

Let's review 2021. How did we get to today?

Craig Johnson: The broader market for 2021 really got out of the gates in a very quick fashion. And what's interesting is when you go back and you look at the entire year, the low watermark for the year was Jan. 4, at around 3,700 for the S&P 500. And really the market never really looked back. Really the challenge has been some of the smallest weights in the entire marketplace have been really what's been driving the performance, the energy sector, which is a single-digit part of the entire market complex at this point in time. And one of our largest sectors, technology, has been among the weakest. I find that to be a challenging environment for a lot of the portfolio managers that I've been having conversations with over this entire year.

Jim Paulsen: A couple things stand out. One is just the amazing profit story that we're in here in the second year of COVID. We've still got one-year forward estimates continuing to rise. And as good as S&P 500 earnings have been, the S&P 600 small cap earnings have even been more phenomenal; even international earnings have been awfully good. I think that has a lot to do with the remnants of a pandemic, which forced all companies in the world to go to maximum efficiency in order to survive. Every horse had its day in the sun. Everyone had winners, but everyone had a tough period, too, where they underperformed — whatever you held. We can be disappointed with all that, but with the markets up this much, how can anyone feel bad?

Carol Schleif: An ideal environment for stocks overall is one where fundamentals are bad and improving but consumer or investor sentiment is skeptical, and we definitely had both sides of those in spades. There were unprecedented steps that companies made to right-size right away preparing for recession and ... we had a five-week bear market, so the companies were right-sized for that. Plus, Congress and the administration learned a lesson from the 2008-2009 crisis. In this one, we had unprecedented fiscal and monetary stimulus hit at the same time. The combination of those two factors in a very skeptical environment really teed you up for the kind of market that that we had.

Mansco Perry: As I did last year, I remain completely and totally perplexed by what's happened. Since the low of March, the markets are up about 110%, and since the bottoming out in March 2009, we're up about 600%. All the indicators seem to point that we will continue, but can we continue forever? I like equities, so we have a pretty strong growth portfolio. But given non-economic factors that I see here and around the world, I remain a little bit, maybe a lot, cautious that this can't continue and that at some point we will get the correction we've been talking about for the last decade.

Biff Robillard: I personally view the last few years as very convincing ratification of the world we're in: the technology-based global economy. This was a tremendously successful pandemic from the standpoint that society brought to bear these newly added resources in biotechnology, medicine, the communication and so forth, and the economies did better than we expected — much better. I'm no longer concerned about winning the war. I think we've successfully navigated this particular crisis, and we are leaving a war footing in so many ways, economically, psychologically and so forth. Therefore, I spend a lot of time thinking about how as an investor, how can I win the peace? It's much trickier on the other side. I think, just as perhaps investors have become accustomed to an environment of high returns during a period of crisis, we're entering a period of a lot of frustration with better news but worse returns.

What are some of the more enduring pandemic trends that are likely to influence investment choices going forward?

Johnson: One of the investing places that I'll be watching is going to be security software. Watch very carefully stocks like CrowdStrike Holdings Inc. and Fortinet Inc. Also, collaboration software is going to continue to be a big theme for us. Microsoft, Adobe, any cloud-based applications. And then also homebuilders. There's still a very big shortage of homes out there. A lot of people are going to be working a few days at home, and we're going to need a nicer home office and perhaps a little bit more space. That's going to be a trend that continues to play out. Now on the weaker side, I'd start out with less emphasis in office space; perhaps we're going to have more shared office space going forward that might be a negative for some of the REITs [real estate investment trusts]. And then also the airlines. I think there's going to be less business travel, fewer activities where you fly out to Boston for a lunch and come back in the same day.

Erica Bergsland: I think that a tighter labor market is here to stay for the next couple of years. One thing that happened during this period of time was an acceleration of retirements. For years, we've been talking about how older workers need to stay in the workforce longer. But we kind of saw the opposite over the last couple of years, which is a function of some of the market appreciation. Another thing is immigration — we have a lot less immigration today than we had before COVID, and that probably isn't going to reverse itself quickly. That's going to create lower labor force growth, which was already challenged. That caps the ability of the economy to grow. Work-from-home also is influencing where people choose to live. We've seen a big influx of workers to low-cost states like Texas and Florida at the expense of other states. It will be interesting to see if that trend continues and puts pressure on higher cost states to rethink their tax policies. Finally, what we saw during COVID was limitations of monetary policy and the power of fiscal policy. I think policy coordination is probably here to stay. Not that we are experts at predicting the outcomes of monetary policy, but this is a more unpredictable mix.

Which investment sectors will most likely benefit from the infrastructure bill? Can we expect more municipal bond offerings?

Johnson: If you look at the $1 trillion infrastructure bill, you've got $66 billion for rail, $65 billion for broadband, another $65 billion coming in for power grids and water systems. So if you kind of link that back to sectors, clearly the industrial sector is going to be a natural beneficiary of some of this infrastructure bill. Companies like Caterpillar or Astec Industries, which is doing road construction. Also Wabtec Corp., which is doing a lot with rails and rail cars and trains. Then in technology, I'd come back to the theme that I touched on, which would be security. We are going to see a lot of broadband get connected up for individuals — security, firewalls, those things are going to be important. And then a company with Minnesota operations that probably could do very well here would be Cleveland-Cliffs, up there on the North Shore. It has the taconite and also steel, so this could be a nice beneficiary from this infrastructure spending.

Perry: For me, the big winner is going to be telecom and the outgrowth of broadband, particularly if they cover as much of rural areas as has been alluded to. Then I think about the push for electric vehicles, which I think will be great if they can find a way to improve batteries and find a broader scale to expand the grid to cover all these vehicles.

Bergsland: This is a welcome investment in our infrastructure, but it's not going to be a game changer. Of the more than a trillion dollars, only $550 billion dollars is new spending. And that is spread out over a number of years, so it's not going to be the same sort of demand shock that we saw from the stimulus last year. It is much needed, though. When you look at the infrastructure in the United States compared to other countries, we have underinvested. In my view, the impact is going to be more trying to catch us up, not necessarily stimulate the economy to new heights, and most Wall Street firms are predicting it's not going to have a big impact on municipal issuance.

Lisa Erickson: On the municipal side, we would agree this isn't necessarily going to bring relief to people who have been hoping for more supplied municipal bonds. The legislation really didn't bring back some of the programs that have been used in the past — for example, the build America bonds that had special tax incentives for municipals. The good news about a lot of what happened is municipalities, like companies and individuals, actually were able to improve their financial position, so again many individual local and state governments actually are in pretty good financial shape such that they don't necessarily have to go out and issue a lot more debt.

Are current supply chain issues typical of an economic rebound or are they a signal of a more enduring roadblock to economic growth?

Paulsen: The vast majority of the time we suffer transitory inflation spikes throughout history, most of those were associated with supply chain problems due to a bust/boom cycle in the economy. This just wasn't a U.S. phenomenon, this was a global synchronized phenomenon, so we have affected every supply chain in the world, all at the same time. We might never have done that before in the history of the world. So you can see why this seems so big, but again, I think it probably has decent odds of catching up, if you will.

Schleif: It's important to remember that a supply chain really didn't break per se. We've basically had a more fragile and interrelated supply chain than anytime previously, given the globalization that's gone on over the last couple of decades. When all of a sudden we had a boom instead of a recession, and you threw 20% more demand, and then you shifted the demand toward services from stuff. When we were all forced to stay home, everyone said, 'I want a Peloton, I want weights, I want my groceries delivered.' So we changed the composition.

How should investors manage their retirement accounts amid rising inflation and possible interest rate hikes?

Robillard: Investors who for the last 30 years have merely embraced the fundamental direction of the river have done far better than investors who have questioned it, bet against it, and fancy-footed it, for lack of a better term. So no fancy footwork. Investors would be wise to, at least annually, systematically explore these trends in interest rates and inflation and be sure that you're asking the right questions. There's potential for an epic change and you need to be prepared to make the mental adjustments to embrace it as the evidence mounts.

Erickson: I think the question that each investor has to ask is if I need to have a little bit more of that growth potential in my portfolio to offset the fact that rates might go up. Does that make sense from my risk tolerance, or on the other side of the ledger do I need to look at my budget-cutting costs?

Bergsland: Homeowners or potential homeowners can avail themselves of rock-bottom financing costs relative to inflation. If you're early in your career and your wages are going to go up over time, it's probably still a pretty good time to buy a house. And I also would emphasize diversification.

What are your predictions for the S&P 500 for 2022?

Johnson: We're looking for 5,150 for next year on the S&P 500, and I think you're going to get to these numbers through a continual reopening of the economy. It's going to be consumer consumption continuing to push this market higher. Earnings are going to continue to power this market higher, just like they have in 2021. If you look at the earnings forecast for next year, it still looks like they're too low, and they will probably have to go higher.

Schleif: I'll go right up the middle and say 5,050 on the S&P, and I think we get there with some volatility. We should start the year pretty strong, especially because I think a lot of the trends that are in place right now that are concerning investors — the supply chain, inflation and even the pandemic — hopefully are at their peak and will start to taper off. But you have a lot of other issues that markets will need to deal with in the next year. The fact that we're not going back to a pre-pandemic normal, if you will, psychologically may weigh on some people, as well as if additional variants come out. In the summer and early fall, when we get into the midterm election cycle, there could be a lot of angst that relates to that as well. But we still think it's a constructive market overall.

Bergsland: We agree with the idea that inflation is probably going to peak in the next few months and come down, but we think that people are overly optimistic in how quickly it's going to come down, and that will affect earnings. If the Fed gets behind the curve and feels like they have to slow down the economy, we're worried that valuations could take a real hit in asset classes like equities and high yield. If that doesn't happen, we're looking for the markets to continue to go up and would bank a 5 or 6% increase from today. I would say, maybe 4,800, but again take that with a grain of salt. It's a fool's errand to try and predict the market on a given day.

Paulsen: I think we're going have good growth next year — 4.5% real GDP growth. I think earnings this year, $220 a share on the S&P 500, probably $240 next year. The average price-earnings multiple on trailing S&P earnings right now in the last 30 years is 20.7 times earnings. I apply that to 240 and come up right about 5,000, so it puts us right where everyone is. But I'd say this: I think we're going to see 4,000 and 5,000 next year. I think we'll have a 15% correction and will also see this market hit 5,000. I don't know if we'll be there year-end, but we have to pick something. I think the underlying fundamentals are going be pretty strong this year — a little moderating inflation, still above average, growth rate is pretty good. But what I think is going to change is we have a real shot of finally declaring victory in this country, for the first time simultaneously, over COVID and inflation at the same time.

Erickson: We're at 5,060. That's really based on the idea that we believe multiples can be sustained somewhere around 23 times and that earnings will continue to power, maybe not at the same pace, as they are this year. We do think there's upside to that. Obviously companies have been very resilient this year but we're starting out at 5,060.

Robillard: It will be a year that shares a sentiment with 2020. Then we asked, why can the market be so good and the economy be so bad? Next year we will ask, how can the market be so bad when the economy is so good? I sense that there'll be a market decline and a rally, and when the dust clears, it will be a slightly sub-average year, which brings me to 4,800.

Perry: I'll continue with my scientific method of forecasting, and I'll come out to 5,075, which is almost 10%, but with a lot of volatility. So get ready for a roller coaster ride.